- Glossary
- Variable Costs
Variable Costs
Costs that fluctuate according to the quantity of goods or services a company produces are referred to as variable costs.These are, therefore, costs that vary according to the intensity of an activity. Costs rise as activity volume grows, and diminish as activity volume decreases.
Understanding Variable Costs
Any business's overall expenses are made up of both variable and fixed costs. Sales or production output determine variable costs. For units produced, the variable cost of production is a fixed sum. Variable costs will climb in tandem with output and production volume. On the other hand, if fewer products are produced, the variable manufacturing costs will decrease.
Note: Since they can be readily altered, variable expenses are typically seen as short-term costs. For instance, if a business is suffering cash flow problems, they may decide right once to change output in order to avoid incurring these expenditures.
Types Of Variable Costs
The Most Common Variable Costs are:
- Direct resources
- Direct work
- Fees for transactions
- Commissions
- Utility prices
- Payable work
Formula And Calculation Of Variable Costs
The total variable cost is calculated by multiplying the output quantity by the variable cost per unit of output.
Total Variable Cost = Total Quantity of Output X Variable Cost Per Unit of Output
Throughout profits, the variable cost per unit will change. It can generally be computed specifically as the total of the many forms of variable costs covered below. If variable expenses are incurred in batches, they might need to be divided among the commodities (For example, 100 pounds of raw materials are acquired to produce 10,000 completed goods).
Importance Of Variable Cost Analysis
There are several approaches to examine costs, pricing, and profitability using variable costing data.
The importance of variable cost analysis is supported by the following:
- Variable expenses aid in pricing determination. Typically, a business works to price its products competitively in order to recoup the cost of production.
- Variable expenditures are a crucial component of planning and budgeting. A business may decide to quadruple its output the next year in an effort to increase sales.
- The break-even point is determined by variable costs. The break-even point of a business is determined by dividing fixed costs by contribution margin, which is determined by dividing revenue by variable costs.
- Margin and net income are determined by variable costs. Calculations of the gross margin, profit margin, and net income sometimes include both fixed and variable costs.
- The cost structure of a corporation is impacted by variable costs. Consider a scenario where a business wants to hire some machinery. It has the option of paying either $1,000 (fixed fee) or $0.05 for each manufactured good.
Conclusion
- A variable cost is an expense that varies according to production output or sales.
- Variable expenses rise in response to rising output or sales and fall in response to the inverse.
- Unlike fixed costs, which do not alter in accordance with production or sales volume, variable costs are not affected by these factors.
- Contribution margin, the parameter used to calculate a company's break-even point or target profit level, is mostly dependent on variable expenses for a given product.
- Raw materials, labor, utilities, commissions, and distribution expenses are a few examples of variable costs.
